Bear Down: Should You Take Advantage of the '22 Stock Rally?

2022 has been a bear of a year for investors, but it looks like the market is rallying just past the mid-year mark. Does this mean we are beating back the Bear Market or is it just a temporary pause in the downward trend? Here's some insights on what experts are saying in case you are rethinking your investment strategy. Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Ray of Light?

When we focus on nothing but deteriorating economic conditions and negative market news, an occasional hint of optimism offers welcome, if not real, relief. Whether we buy into it…or not…is another matter. But it never hurts to examine what's going on, particularly when you can access expert information from a giant in the investment game.

I’m a conservative by nature and a bit of a pessimist, but most important issues need the airing of arguments supporting both pros and cons.

Expert Insights

At least one of the country’s big banks suggests that the current stock rally will not be a typical bear market rally. Such rallies have been known to lull investors to act without caution, or worse, to sleep, and then re-emerge growling with costly ferocity.

JP Morgan, a global leader in financial services, proposes that the rally could very well extend into the year’s final two quarters. As corporate earnings are revised downward…as they surely will be if recession rears its ugly head…the risk-reward for equities will not necessarily be all bad. These more reasonable valuations, accompanied by continuing depressed investor sentiment and peaking Fed inflation fighting are all reasons to be a tiny bit bullish.

Top Ten

JP Morgan gives 10 reasons to support their position:

1. Valuations look attractive, in absolute terms and relative to fixed income.

2. There are elevated cash levels among institutional investors, and an emerging appetite to begin putting funds to work.

3. Investor sentiment is too bearish, near a 30-year-low range (often viewed as a bullish indicator for stocks).

4. The Fed’s hawkishness has likely peaked as it moves above the neutral range. July showed a slight decline in inflation. The CPI rose 8.5% from a year earlier, down from June’s 9.1% pace…thanks largely to declining gasoline prices.

5. The U.S. dollar has likely peaked for the year.

6. The economic slowdown isn't showing signs of a really nasty recession. Banks' balance sheets are in a strong position, which will allow them to keep supporting the business cycle.

7. While housing activity has weakened sharply, and house prices have levelled off after strong gains, higher income consumers remain resilient. (Very important for the consumer wealth effect).

8. Earnings revisions are negative and will see a reset, but they will not be marked down aggressively.

9. Although savings rates are expected to dip below long term averages, excess savings accumulated during the pandemic and a strong labor market will provide a cushion to consumer spending.

10. The global down cycle is unlikely to be synchronized, as China activity is turning for the better, counter-cyclically to developed markets in the second half.

Counter Point(s)

These are, of course, a single company’s views. A counter-perspective might include economic issues like:

1. Slowing corporate earnings growth.

2. Persistently rising inflation.

3. An aggressive Fed Reserve continuing to raise interest rates to combat inflation.

4. Increasing possibility of a severe recession.

Such a foursome of depressants hovering over the S&P 500 could exceed those June lows or further motivate the S&P 500 to lose at least 8% or more from current levels.

Crystal Ball

Ah, for a crystal ball - but we don’t have one of those. In its absence, we most certainly need an emergency fund in place and a good quality, highly-diversified investment portfolio, and the patience to stick with our convictions.

Because ultimately this, too, shall pass.